Chamber pushes on taxes, entitlement reform

By Donovan Slack

11/14/12 12:37 PM EST

The Chamber of Commerce and more than 200 other business groups fired off a letter to President Obama and Congress on Wednesday pushing for the extension of tax cuts for every income bracket and fundamental reforms to entitlement programs.

"Our nation’s entitlement programs are unsustainable. If we do not make sensible reforms, the programs will go bankrupt—and so will the nation. No one can dispute that," the groups wrote. "As Congress and the Administration work to resolve America’s growing financial challenges and escalating debt, they must begin to fundamentally restructure these entitlement programs. "

The letter comes as Obama is poised to meet with business leaders at the White House to discuss the fiscal cliff. He said in meetings with labor and civic leaders on Tuesday that he is sticking behind his campaign promise to veto any extension of tax cuts for the wealthiest 2 percent of Americans. The leaders said they also spoke with him about entitlement programs and the need to keep them intact.

Here's the full letter from the Chamber and 232 other business groups:

TO THE MEMBERS OF THE UNITED STATES CONGRESS AND THE PRESIDENT:

The undersigned organizations call on Congress and the President to immediately begin a process to fundamentally restructure our nation’s entitlement programs—Medicare, Medicaid and Social Security—and to put these valued and important programs on a sustainable financial path.

“In the past few years, the federal government has been recording the largest budget deficits since 1945, both in dollar terms and as a share of the economy. Consequently, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output, a little above the 40-year average of 38 percent. Since then, the figure has shot upward: By the end of this year (2012), the Congressional Budget Office (CBO) projects, federal debt will exceed 70 percent of GDP—the highest percentage since shortly after World War II.”

If we are ever to get control of these large deficits and rising debt levels, we must get control of the principal cause of these deficits—federal spending. For 2012, the total projected outlays for the federal government for all spending (mandatory, discretionary and net interest) is $3.56 trillion. Of that total, mandatory spending (Medicare, Medicaid, Social Security and other social programs) is $2.05 trillion or 57.6% of total spending. Discretionary spending is $1.29 trillion, or 36.2% of total spending and interest on the debt is $220.5 billion, just over 6% of the total.

Meanwhile, total revenue collected by the federal government is $2.44 trillion. About $1.12 trillion is collected via the individual income tax, $181 billion comes from corporate income tax and the rest, $1.03 trillion, comes from Social Security, excise and other taxes. When the expenditures are netted against the revenues, we see a deficit of $1.2 trillion.

Even a cursory examination of these numbers indicates that mandatory spending is not only the biggest category of federal spending but it already exceeds all revenue collected from federal income taxes by a wide margin. Even more troubling, according to the Congressional Budget Office (CBO), mandatory spending is projected to increase in the next 10 years from just over $2 trillion to over $3.5 trillion. At that time, it will represent almost 65% of total spending.

A primary reason for the growth of debt is demographics. Starting in January of this year, an estimated 10,000 baby boomers began retiring daily. The baby boomer wave of 77 million Americans entering our entitlement programs has started. They will place a significant and sustained increase in the share of the population receiving benefits from Social Security and Medicare, as well as long-term care services financed by Medicaid.

CBO’s report stated: “During the next decade alone, the number of people over the age of 65 is expected to rise by more than a third. Over the longer term, the share of people age 65 or older is projected to grow from about 13 percent now to 20 percent in 2037, whereas the share of people ages 20 to 64 is expected to fall from 60 percent to 55 percent.” Demography is destiny and unlike other aspects of the entitlement debates, demographics are facts.

Medicare and Medicaid

Medicare is the third largest program in the federal budget and cost nearly $560 billion in 2011 — or 16% of total federal spending. Federal spending for Medicare and Medicaid rose from 2.2% of GDP in fiscal year 1985 to 5.6% in 2011 according to CBO. Well over half of that was Medicare, and the retirement of the baby boom, combined with growth of health care costs, is projected to push Medicare spending from 3.7% of GDP in 2011 to 6.4% of GDP in 2035.

Driving these realities is the underlying worker-to-beneficiary ratio. In 1965, there were about 4.6 workers for each Medicare beneficiary. In 2005, there were about 3.8 workers for each Medicare beneficiary. In 2020, there are projected to be only 2.2 workers for each Medicare beneficiary.

As President Obama said on October 3, Medicare is “the big driver of our deficits right now.”

Social Security

The federal government spends more on Social Security than it does on any other single program. The CBO estimates that outlays for Social Security in fiscal year 2012 will total $769 billion, accounting for more than one-fifth of all federal spending.

The cost of the Social Security program will rise significantly in coming decades as more members of the baby-boom generation reach retirement age and longer life spans leads to longer retirements. As a result, a significantly larger share of the population will draw benefits.

In 2010, for the first time since the enactment of the Social Security Amendments in 1983, annual outlays for the program exceeded annual revenues excluding interest credited to the trust funds. CBO projects that the gap will continue and that outlays will be greater than revenues by around 10% over the next decade. After that, the shortfall will only grow.

The aging of the population is due to both increased life expectancy and decreased fertility. In 1965, 65-year-old retirees could expect to live for 14.7 more years; by 2006, they could expect to live for 18.6 more years. In 1965, the fertility rate was 96.3 births per 1,000 females aged 15 to 44; by 2004, it had fallen to 60.7 births.

Conclusion

Our nation’s entitlement programs are unsustainable. If we do not make sensible reforms, the programs will go bankrupt—and so will the nation. No one can dispute that.

As Congress and the Administration work to resolve America’s growing financial challenges and escalating debt, they must begin to fundamentally restructure these entitlement programs. The undersigned organizations recognize that these issues are daunting ones, but the demographic facts, the fundamental reality of a broken financing mechanism combined with extending life expectancy and, 77 million more people entering these programs require taking action now.

Short term action is not a substitute for long term fundamental fiscal reform. In addition to immediate action on the fiscal cliff, we also urge you to: Firmly commit to tackling comprehensive tax reform in the next Congress; and Agree to develop a long term plan to address America’s excessive spending, particularly entitlement spending.